BUSI 420 Textbook Assignment 1 Margin Calls & Short Selling Assignment solutions complete answers
Question 1
You decide to buy 1,500 shares of stock at a price of $90 and an initial margin of 65 percent. What is the maximum percentage decline in the stock price before you will receive a margin call if the maintenance margin is 40 percent? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Enter your answer as a positive value.)
Question 2
You believe the price of Freeze Frame Co. stock is going to fall, so you short 400 shares at a price of $62. The initial margin is 55 percent. Ignore dividends.
a. Construct the equity balance sheet for the original trade. (Input all amounts as positive values.)
b-1. Construct an equity balance sheet for a stock price of $57 per share. (Input all amounts as positive values.)
b-2. What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b-3. What is your effective annual return if you cover your short position at this price in five months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
c-1. Construct an equity balance sheet for a stock price of $67 per share. (Input all amounts as positive values.)
c-2. What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
c-3. What is your effective annual return if you cover your short position at this price in five months? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
You believe the price of Freeze Frame Company stock is going to fall, so you short 500 shares at a price of $66. The initial margin is 70 percent. Ignore dividends.
1. a. Construct the equity balance sheet for the original trade.
Note: Input all amounts as positive values.
2. b-1. Construct equity balance sheets for a stock price of $57 per share.
Note: Input all amounts as positive values.
3. b-2. What is your margin?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
4. b-3. What is your effective annual return if you cover your short position at this price in four months?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
5. c-1. Construct equity balance sheets for a stock price of $71 per share.
Note: Input all amounts as positive values.
6. c-2. What is your margin?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
7. c-3. What is your effective annual return if you cover your short position at this price in four months?
Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
You decide to buy 1,100 shares of stock at a price of $82 and an initial margin of 80 percent. What is the maximum percentage decline in the stock price before you will receive a margin call if the maintenance margin is 40 percent?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Input the amount as a positive value.
